Corporate Executive Board CEO Discusses Q4 2010 - Earnings Call Transcript

| About: CEB Inc. (CEB)

The Corporate Executive Board Co. (EXBD) Q4 2010 Earnings Call February 10, 2011 9:00 AM ET


Tom Monahan – Chief Executive Officer

Richard Lindahl – Chief Financial Officer


Paul Ginocchio – Deutsche Bank Securities

Tim McHugh – William Blair & Company

David Ridley-Lane – Bank of America Merrill Lynch

Toni Kaplan – Morgan Stanley

Dan Leben – Robert W. Baird


Good morning and welcome to the Corporate Executive Board’s Fourth Quarter 2010 conference call. Today’s call is being recorded and will be available for replay beginning today and through February 18 by dialing 719-457-0820. The confirmation code for the replay is 5213049. The replay will also be available beginning later today and through February 18 at the Company’s website, which is, and at

To the extent any non-GAAP financial measures discussed in today’s call, you will also fin a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the Company’s website and following the Investors link to yesterday’s news release. You will also find a PDF of the supporting materials that the Company will use in its prepared remarks this morning by following the Investors link to the fourth quarter webcast. Please review the second page of these materials, which includes important information about any forward-looking statement information in the presentation.

This presentation may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding the Corporate Executive Board’s expected quarterly and annual financial performance for fiscal 2011. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors among others set forth in the Corporate Executive Board’s filings with the Securities and Exchange Commission and in its fourth quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

At this time, for opening remarks I’d like to turn the conference over to the Company’s Chief Financial Officer, Mr. Richard Lindahl. Please go ahead, sir.

Richard Lindahl

Thank you, Scott, and good morning everyone. I’m Rich Lindahl, Chief Financial Officer of the Corporate Executive Board. Thank you for calling or logging into our Fourth Quarter and Full Year 2010 Earnings call.

Here’s a quick overview of our time together this morning. I’ll begin by giving you a financial perspective on the quarter and the year and we’ll also review our 2011 guidance. Next, Tom Monahan, our Chief Executive Officer, will provide an update on our operational progress and the strategic priorities we are following to build long-term shareholder value; then we will take your questions.

Please turn to Slide 3 of our presentation for the key messages we’d like you to take away from today’s discussion. Overall we are pleased with our results in 2010 although we still see considerable opportunities to improve. We delivered on our financial commitments and entered 2011 with solid momentum, having now established a foundation for healthy, sustainable growth over time; and our 2011 plan balances profit growth with select investments to create long-term value.

Please turn to Slide 4 for an overview of our financial results. At December 31, 2010, contract value was $447.1 million, which is an increase of 13.5% from December 31, 2009. This growth includes a contribution of $13.7 million or 3.5% from Iconoculture. Our teams extended their year-to-date progress on renewals, cross-sales, and new sales to produce a solid year-end finish. As you can see on Page 5 of yesterday’s earnings press release, in 2010 we experienced year-over-year improvement in every operating statistic we report, including continued growth in both large corporate and middle market institutions and memberships, an increase in our overall cross-sell ratio to 2.96 from 2.87, and a 500 basis point gain in our client renewal rate to 83%.

Our North American and Asia Pacific teams again performed very well during the quarter, growing both sequentially and on a year-over-year basis. In Europe we took another step forward and generated year-over-year growth even as the transition to our account management model, which as you’ll recall began in the second quarter, continued.

Revenues were $117 million in the fourth quarter, an 8.4% increase compared to 108 million in the fourth quarter of 2009. Iconoculture accounted for approximately 3% of the increase. For the full year of 2010, revenues were $438.9 million, a decline of 0.9% from 2009. The combination of cost of services, member relations and marketing, and general administrative costs increased by $13.3 million from the fourth quarter of 2009 to the fourth quarter of 2010. Most of this change was driven by additional staff in the product and commercial functions, increased incentive accruals, greater volume-based costs, and additional spending on marketing and product development; and about one-third of the increase was due to the addition of Iconoculture. These trends resulted in lower year-over-year adjusted EBITDA margins as implied by the updated financial guidance we provided in November.

For the full year of 2010, these combined expenses increased by approximately $8 million as the run rate benefits of the significant cost reduction actions taken in 2009 were offset by investments in new market opportunities, product development activities, increased commercial capacity, and the additions of Iconoculture and TowerGroup.

Before continuing on to the rest of the financial statement analysis, I’ll make a few comments on the sequential trends in operating expenses, which increased about $8.3 million versus the third quarter. First, it’s important to remember that we plan and manage our business on an annual basis and that the sequential trends are impacted by seasonality and timing. The fourth quarter is our busiest time of year on the sales front and that drives greater activity and expense through the system. In the fourth quarter, you also see more accrual true-ups to actual full year results. This has significant impact on accrued incentive expense for both sales commissions and annual performance bonuses. This year was no exception on that front as our final bookings exceeded our internal targets by a healthy margin. We’ve also continued to invest in product development and have stepped up our efforts to more effectively generate market and brand awareness. These efforts lifted expense as teams pushed hard to achieve milestones before the end of the year.

Finally, there were a variety of items that were mostly non-recurring, such as some Iconoculture integration expense, or that for timing reasons pushed into 4Q, such as increased recruiting costs.

Moving on to other income, in the fourth quarter it was $1.3 million, which is essentially flat compared to the fourth quarter of 2009. For the full year of 2010, other income was down $3.1 million from 2009 largely due to smaller gains on foreign currency translation and deferred compensation plan assets. Adjusted EBITDA margin, which as you know does not exclude stock compensation expense, in the fourth quarter was 19.7% versus 24.5% in 2009. Full year 2010 adjusted EBITDA margin was 22.8%, a decline of 300 basis points from 2009. As we communicated regularly throughout the year, we fully expected this result based on the combination of the revenue lag effect and the select investments we made to reestablish growth in our business.

Depreciation and amortization in the fourth quarter of 2010 decreased by half a million dollars from 2009 largely due to the third quarter impairment loss which reduced our amortizable intangible asset balance. Additionally, the completion of asset depreciable lifecycles caused full year 2010 depreciation and amortization expense to decline by 2.5 million versus 2009.

Our effective tax rate remained at 41%.

Non-GAAP diluted earnings per share was $0.31 in the fourth quarter of 2010, a decline of 22.5% from the $0.40 we reported in the prior year period. Full year 2010 non-GAAP diluted earnings per share was $1.40, a decline of 16.7% versus the $1.68 in 2009. As we discussed with you throughout last year, the revenue lag effect when combined with our select growth investments put pressure on our margins and earnings in 2010 as compared to 2009.

Turning to the balance sheet, membership fees receivable increased seasonally to 141.3 million at December 31, 2010 as compared to 88.8 million at September 30, 2010. Average days sales outstanding were 88 days for the fourth quarter, consistent with historical seasonal ranges. Deferred revenues also grew seasonally as the current portion increased sequentially by $51.9 million or 26% to $251.2 million at December 31, 2010. As compared to the prior year, deferred revenues increased by 13.1% due to improved year-over-year bookings and the inclusion of Iconoculture. We remain encouraged by these trends and the favorable implications they have on our near-term revenue growth.

Cash flows from operations in 2010 were $85.1 million, an increase of 198% versus 2009. Fourth quarter cash flows benefited from improved collections activity and seasonally stronger bookings. During 2010, we spent $14 million on acquisitions and 8.3 million on capital expenditures. We also paid out 15.1 million in dividends. We ended 2010 with 123.5 million in cash, cash equivalents and marketable securities, an increase of 62% as compared to the $76.2 million on hand at the end of 2009.

Turning to Slide 5, I’ll provide some context on how we are thinking about future revenues and profitability and discuss how we have laid a solid foundation for healthy, sustainable growth. On the top half of the page, you’ll note that we again saw increases in the year-over-year growth rates of both contract value and deferred revenues, our two key leading indicators of revenues. These trends, as well as the evolving composition of our growth, inform our expectations for 2011. In the near term, we anticipate the majority of our revenue growth will come from our existing subscription business. We will also continue to identify and pursue opportunities to extend our platform into new markets, as you saw us do in 2010, with stronger pushes into the government sector and Southeast Asia; and increasingly we expect to see additional contributions from new products and services.

Moving to the bottom half of the page, we remain committed to delivering a highly attractive profitability profile. We will continue to leverage the scalability of our existing subscription business to generate high incremental margins that contribute to increased revenues and cash flow. However, as you can see in the chart, our adjusted EBITDA margins in 2010 are slightly below the historical highs experienced in 2006; and you will recall that 2009 margins benefited from the revenue lag effect and the aggressive cost actions taken early in the year in anticipation of declining revenue.

For 2011, we expect margins to remain in the current area as we will continue to invest in support of the overall growth in our business in technology and service that enhance member impact and loyalty and in new products and market extensions where the earlier stage nature of those opportunities tends to deliver lower margins. While these investments mean that margins will likely remain at current levels for the foreseeable future, we believe that all of these investments will result in improved revenue and cash flow growth over time.

Next I’ll discuss our outlook. The following comments are intended to fall under the Safe Harbor provisions outlined at the beginning of the call and are based on preliminary assumptions which are subject to change over time.

Please turn to Slide 6. We have constructed our 2011 plan with an eye towards balancing profit and cash flow growth with select investments to create long-term value. From an income statement perspective, you’ll see us continue to pursue sustainable top line growth, attractive profitability, and also see improving cash flow from our existing subscription business. We are also planning for additional investments in new products and market extensions to further enhance organic growth.

Our solid finish in 2010 means we enter 2011 with strong momentum, and our guidance contemplates what we believe is a realistic range of potential 2011 booking outcomes. Our 2011 guidance is therefore as follows: annual revenues ranging from 475 to $495 million, adjusted EBITDA margin of between 22% and 23.5%, non-GAAP diluted earnings per share of $1.45 to $1.65, depreciation and amortization expense of 17 to $18 million, and capital expenditures of 8 to $10 million.

A few more comments on our guidance. First, as you know, we do not provide quarterly guidance but I would remind you that we do experience certain seasonal impacts related to the patterns of our bookings throughout the year. We would expect to see sequential trends in 2011 that are similar to those which occurred in 2010. Second, we also expect that revenue trends will be impacted to some degree by the timing variability associated with the new revenue recognition rules which are now in force. While we currently expect that only 5 to 10% of our revenue will be affected this year, in some cases revenue recognition may be back-end weighted instead of spread evenly over the life of the member contract. And a final reminder that we continue to collect up front on the vast majority of our contracts, leading to favorable working capital dynamics and operating cash flows that exceed net income when contract value is growing.

From a capital structure perspective, we remain committed to providing appropriate current cash returns to shareholders while also maintaining financial flexibility. To that end, our Board has declared a quarterly dividend of $0.15 per share which reflects a 36% increase from the previous level of $0.11. While this represents a larger increase than last year, we believe it is appropriate in light of our renewed growth profile, current liquidity, and cash flow forecast. I would also note that the magnitude of this increase does not represent a new dividend growth trajectory as we currently expect future dividends to move roughly in line with cash flow growth. The Board will continue to periodically review and adjust our dividend rate based on historical and anticipated earnings in cash flow performance.

Finally, we will continue to maintain ample liquidity to further strengthen our balance sheet and ensure that we have the capacity to act on select investment opportunities from time to time.

Before I hand off to Tom, I’d like to announce that The Corporate Executive Board will be holding its first ever Investor Day on March 18, 2011 at the site of our partners, the New York Stock Exchange. Tom and I will be joined by several other members of our management team for a deeper discussion of our growth strategies, opportunities, and financial expectations. Attendance is by invitation only and registration is required. We will also provide a live webcast of the event. Please contact me for more information if you are interested in attending.

That’s it for the financial summary. Please turn to Slide 7 and I’ll turn the call over to Tom.

Tom Monahan

Thank you, Rich. Good morning. As Rich has made clear, we’re pleased with the performance against our key objectives. Our teams are proving that the combination of must-have resources and insight and technology-enabled service produce solid growth and member loyalty in revenue. More broadly, while we’re pleased with the momentum that our teams have created over the past several quarters, we’re also aware that we currently support only a fraction of the member work and decisions that we can and should. This obviously suggests that we have continued opportunity not only to perform at an ever-higher level in our existing businesses and markets but to stake out new avenues for growth and impact.

Our objectives for 2010 were not only to return the Company to solid levels of contract value growth but to lay the groundwork for healthy, sustainable growth in the years ahead. We met both of these objectives in 2010, and in 2011 our objective is to begin building on what we believe is now a strong foundation for long-term profitable growth.

Our priorities for the year have in turn evolved to support this objective and clarify our investments and growth expectations. We must both leverage and reinforce our strength in content and member relationships, and at the same time invest in the development of new markets and new offerings to meet emerging member needs.

As shown on Slide 7, our four core priorities for 2011 and beyond are creating uniquely valuable insights into corporate performance; driving loyalty, growth and brand strength through high-value member engagement; investing globally in key markets; and leveraging technology and service to deliver innovative products. Let me spend a moment on each priority, recapping our progress and laying out our plans for the coming year.

Please turn to Slide 8, where I’ll discuss our first priority – creating uniquely valuable insights into corporate performance. Our business begins and ends with great content culled from deep research, unique data, and powerful analysis. Giving members definitive answers to their most pressing challenges drives their engagement with us. Insight also provides a foundation for future growth, as our research creates opportunities for new data assets, tools and technology, and ultimately new revenue streams.

In 2010, our teams produced outstanding content across all of our practice areas, including insights into managing employee engagement capital and long-term productivity, driving sales force performance, managing investment for growth coming out of the Great Recession, as well as strategies for measuring and managing corporate integrity in an increasingly global business environment.

I’d like to spend just a minute highlighting some of our work in the fields of technology and innovation. Much of our work over the years has pointed to the importance of managing IT spend effectively and orchestrating a great R&D pipeline. This year our teams produced some really powerful insights and tools to help members accomplish these objectives. Our IT practice occupies a unique niche in a crowded field. In an industry where much of the attention centers on evaluating – sometimes even breathlessly hyping – leading edge technologies, our teams have built insights and data that help CIOs ensure that their organizations can harness those advances in technology to drive the bottom line.

Coming out of the recession, our team saw a series of changes fundamentally reshaping the demands on corporate IT such as the maturity of global shared services, COG computing, and most importantly line organizations that are substantially more literate and capable with technology. As a result of these changes, IT leaders face a series of pressing questions about what the IT function does and how it does it. These questions include what activities should actually belong to IT, how do I translate corporate strategies into IT strategies, what skills will my IT organization need, and how should I organize my people for optimum ROI? How do I manage both the technical and human risks to the security environment? And perhaps most importantly, how do I continue to measure and drive ROI on our technology investments?

This research is a great example of how we leverage our cross C-suite perspectives to help executives in a specific role. We identified questions and trends using our research from finance, HR, sales and marketing, and strategy; and we tapped our memberships to interview CFOs, GMs and heads of sales, procurement and HR to understand what they need from IT and how they can support it over the next five years. Finally, we benchmarked activities and perspectives of IT and business leaders at over 200 leading companies.

It’s also a great example of how great research assets lead to great tools and data. We’ve used the research to create online tools that help a CIO conduct key parts of his or her job such as an online skills and process benchmark that helps members understand the cost and capability of key analytic and information management activities. Our work has had a huge impact on our member companies with CIOs at several Fortune 50 companies making it the centerpiece of their strategy conversations and operating plans.

We also invest in helping our member companies reinvigorate growth in the aftermath of the Great Recession. Our R&D research team analyzed how our highest performing members were seeding innovation pipelines with game-changing ideas. We built benchmarks that assessed R&D productivity and ROI at different stages of the pipeline, and gave members best practice templates for making the front end of their innovation pipeline materially more effective. We also consolidated our findings into a vitality index which members can use as a dashboard to measure innovation process effectiveness. This had great impact on both current member engagement and creating new opportunities for sales.

In 2011, we’ll focus incremental effort in three places. First, making sure that every product team creates authoritative and uniquely valuable insight into their members’ key decisions and critical work. Second, continuing to globalize our research assets by making additional investments in our emerging markets research coverage. We increasingly find that members headquartered in our developed country markets are eager to learn about how these markets and the companies headquartered there operate; and given our great relationships with leading companies around the world, particularly in developing markets, we can uniquely meet that need. Third, continuing to build powerful unique data assets that undergird great insight and generate opportunities to serve recurring parts of members’ workload.

Please turn to Slide 9 where I’ll discuss our second priority – driving loyalty, growth and brand strength through high-value member engagements. Growing revenue per member through higher renewal rates, solid pricing power, cross-sales, and additional services remains the single biggest opportunity in our business. While great content, tools and data are essential, effective engagement and support of members is vital to connecting members and prospective members to the right solutions.

In 2010, we made notable progress in positioning ourselves for success. We completed the global rollout of our new account management model in EMEA. We’re pleased with our progress here and have continued to refine our market approaches in North America and Asia Pacific to ensure the highest level of performance; and we have also begun to add sales and service capacity to key markets around the world.

Our new structure puts our best people in a better position selling our solutions to member work. We see lots of evidence now that this is happening. We achieved some of our highest ever levels of member usage, most notably through our web platform where we saw member usage of our online resources and portals sharply increase across all areas of the business. Similarly, we saw a major leap in all of our member feedback scores. Most importantly, the end result of these efforts has been solid growth in both cross-sales and renewals as members inaugurated or grew their relationship with us. We saw cross-sell in the large corporate market go from 3.3 to 3.41, and from 1.79 to 1.88 in the middle market; and as the year unfolded, we realized solid price increases across both markets and restored momentum on new to CEB sales.

We know that our brand is built primarily through the great ROI that we deliver for our members, but we have taken advantage of opportunities to raise our profile with key users. This helps our teams do their jobs engaging current and prospective members. Here we saw a steep step function increase in the number of tier one media mentions, a 200% increase over 2009, one-third of which was feature length, including three feature length Harvard Business Review articles based on our unique IP and data sets. We also very selectively complemented our efforts with some limited speaking and advertising placements.

While the overwhelming majority of new and cross-sales are a direct result of the creative and energetic work of our teams, we also know that amplifying our brand helps them open doors and land more opportunities. Going forward, we’ll continue our focus on high-value member engagement by selectively adding capacity, particularly to the elite sales teams that help us add the largest companies across the globe that are not yet CEB members. Second, supporting the development and productivity of current sales and service teams with training, career programs, and new career advancement paths that upscale our capabilities and help them grow in their roles. And finally, continuing to leverage our great member impact to selectively extend the reach and range of our brand.

Please turn to Page 10 where I’ll discuss our third priority – investing globally in key markets. The single largest storyline that is shaping corporate and functional strategy at each of our 5,200 member companies is what we have come to call imperfect globalization. The macro storyline here gets all the headlines – anyone who’s walked past an airport newsstand knows that developing economies are entering a growth rate very high relative to developed economies. Across the long term, this is an unqualified good. It frees people, binds nations, and lifts the standard of living for millions. But in the world of the member company, a welter of new shorter-term challenges lands squarely on executive desks: managing risks in new geographies, weathering years of dilutive economics to establish presence in important new markets, and cultivating and managing leaders and supply partners across an expanding footprint.

These imperfections create a great set of common problems for large corporates, whether they are headquartered in Boston, Bonn, Bangalore, or Beijing. We bring a huge set of assets to bear in helping members and prospective members navigate this new set of challenges. Our member network already draws insight and data from companies headquartered in more than 50 countries, but there is much opportunity still ahead for us here. While more than 85% of the U.S. Fortune 500 relies on our work and teams to drive their performance, our penetration rates of similar sized companies outside the U.S. is lower, as is their average spend; and there are at least 1,400 large corporates and at least 14,000 middle market companies globally that don’t yet have their first relationship with us.

Achieving penetration levels in these markets not only drives growth; it further strengthens a key competitive barrier as our data, insights and tools become ever richer and ever more global in scope. The key to deeper penetration is continuing to make market level investments in growth markets. This is a process we began several years ago in the North American middle market. We charged the team with creating sales capabilities, workflow tools, and service strategies that connected our great assets to the work and problems of executives at those companies. In 2010, we continued to invest in North American middle market and saw a continued healthy growth from that key market.

We also put in place teams focused on other key growth markets, most notably global government entities, Southeast Asia from our new Singapore hub, and India where we added sales, service and product resources to our several hundred strong Delhi research center. I’m pleased to report that we saw very healthy growth from all of these markets across 2010, adding a great roster of new members.

We believe that we have earned the right for continued growth through outstanding member impact and brand development. We also know that earnings growth opportunity is not easy and does require real investment. While we can leverage our existing great tools, data, and research, it does take a while for these teams to achieve correct scale at the market level. So as these markets continue to see great success and scale up, we’ll make them a focus of our investment dollars in 2011 to drive them faster to key scale and profitability points.

Given strong performance, however, we do see the opportunity to selectively add market-based teams in other key growth markets in 2011. We’re particularly focused right now on markets in continental Europe where we enjoy a marquee base of loyal members that provide a solid foundation for additional investments. While Europe doesn’t seem likely to boom at any time soon, we do see stability throughout the region and a great opportunity to add a focused market or two across the next 18 months. We expect these growth market investments to show up in cross-sales and particularly in new sales as we penetrate the markets to the next level of depth.

Please turn to Slide 11. Our fourth priority is to leverage technology and service to deliver innovative products. Our fourth priority represents the second major area of investment. While we’re pleased with the continued growth of our existing product lines, we’re also focused on delivering new offerings to members that more tightly link our assets to their ongoing working decisions. Our goal here is to help members not only understand key drivers of performance but to link these insights directly to their daily work and in the process create additional opportunities for growth.

It’s also worth noting that new products aren’t the only form of innovation that drives growth and profit. New features or resources for existing products can drive discontinuous pricing opportunities and pave the way for high contract value growth per member, which is our real objective. So expect to see us deemphasize product count as a metric going forward and instead key in on contract value growth at the member level.

That said, we’re pleased with the progress we made in getting new products into the marketplace across 2010. The most significant addition to our product set was our acquisition of the great data, tools and team from Iconoculture, which enables our sales and marketing practice to meet a pressing recurring member need for insight about key consumer segments. We’ve integrated elements of the Iconoculture data into our own offerings, and our teams have been working successfully to introduce these great solutions to our vast network of leading marketing organizations. We continue to be pleased both with the quality of this business and with the effective integration of our teams and value propositions.

As I mentioned earlier, our members are caught between a wide array of new risks to their business and growing penalties from regulated and capital markets for mismanaging risks as they emerge. From Tahrir Square to Deep Water Horizon to the U.K. Bribery Act, members need new skills and new tools to identify, size, manage and respond to risks in their organization. Two of the products that we launched in 2010 helped them meet these member needs. Our Legal Leadership Academy, which gives in-house counsel the tools to engage line partners centered around risk to the business, had a strong year and created a whole new cadre of CEB fans and users in corporate legal and risk departments. Likewise, the Risk Integration Strategy Council also ramped nicely as it helped to meet member hunger for data, tools, and insights to manage risk.

We’re also pleased with our efforts to add innovative features that drive pricing and stickiness. We are now part-way through rollout of our new web portal, and member response to the new tools that let them link data and tools to daily work has been very positive. We’re also continuing to invest in our functional anatomies, online assessments that help member evaluate performance trends in the functions and processes that they manage by gathering and reporting feedback from their teams and peers about trends that matter.

With our channel reorganization now complete and our teams performing at a high level, innovations that tie our insights directly to member work through technology and services will be a key component of our growth in 2011 and beyond. We’ve got a full slate of new products and upgrades lined up for this year, and we’ll work to keep our pipeline full for coming years. We’ve already moved one product out of beta in 2011 – the IT Leadership Exchange, which takes the great data, insights and resources I mentioned above and versions them for middle market IT organizations. We’re very pleased with the early results of this effort and see enormous opportunity to replicate the success we’ve had with other middle market programs.

And given the success of our recent acquisitions, we’ll also keep an eye out for uniquely valuable assets in our five core domains. We’ll certainly continue to put a major emphasis on growth that comes from products and technologies that we develop ourselves. That said, our deep relationships with member companies and insights into key performance levers gives us a great platform for integrating and selecting acquisitions into our value proposition.

To sum up, please turn to Page 12. We believe that focus on these four priorities sets us up well for continued sustainable, profitable growth in the years ahead. The contours of that growth will reflect the basic physics of our business. Given the size and strength of our North American large corporate and middle market franchises, we’d expect at least half the growth in any given year to come from this market as we combine price increases, cross-sales, and new sales. About a third in any year will come from our international operations in target markets as we achieve larger relationships and deeper penetration, and the remainder will come from products in their first year of operations which are early in their scale ramp. These ratios can and will vary based on in-year priorities and market conditions, but it should give you some sense of how we think about the varying drivers of our growth.

All in all, we accomplished some important objectives in 2010. We exited the year with solid contract value and good revenue momentum, and more importantly laid the groundwork for healthy, sustainable growth in the years ahead. As we enter 2011, our planned balance is a high level of profitability and solid revenue growth with selective investments in very attractive growth opportunities. We’re confident that our plan will deliver both the short and long-term value to our owners and members and create opportunities for our people to have real impact on member companies now and into the future.

On that note, let me close with a brief message about my CEB colleagues around the world. I’m privileged to work with incredibly talented teams who are relentlessly focused on creating valuable solutions and connecting them to member work. Their energy and intellect allowed us to achieve some important milestones together in 2010. We’re pleased with what we’ve accomplished but we also see much work to do to continue to drive our Company’s growth and impact.

Thanks very much for calling and/or logging in. Rich and I will now take your questions.

Question and Answer Session


Thank you. The question and answer session will be conducted electronically. If you’d like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that’s star, one if you have a question at this time.

And we’ll take our first question from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio – Deutsche Bank Securities

Thanks for taking my question. On the middle market cross-sell ratio, it looks like it went down Q-on-Q. If you could just talk to that. Also you’d mentioned earlier about the Q-on-Q CV changes looking like last year. Does that mean we’re going to see a down Q-on-Q in the first quarter? Thanks.

Richard Lindahl

Yeah, as far as the middle market cross-sell, we certainly saw great performance in middle market throughout the year. We saw a slightly higher rate of new institution additions there which had an impact on the cross-sell ration; so even though it was up year-over-year, we did see a slight decline on the sequential basis.

As far as the trends for the year, a couple things here – one, just a reminder that at a high level, we see our bookings flow roughly about 30% in the first quarter, roughly 20% in each of the second and third quarters, and about 30% in the fourth quarter. The first quarter is much more heavily weighted towards the renewal side, and actually many of those renewals occur very early in the quarter; and the fourth quarter is more heavily weighted towards new business. So that does create some seasonality, and as you recall last year, we did see a slight decline in both contract value and revenues on a sequential basis, and I wouldn’t be surprised to see a similar trend manifest itself this year. But it just depends on how the bookings play out during the quarter.

Paul Ginocchio – Deutsche Bank Securities

Thank you.


And we’ll go to our next question with Tim McHugh with William Blair & Company.

Tim McHugh – William Blair & Company

Yes. Just maybe kind of start with some questions on expenses, and maybe at a high level if you can just talk a little bit about are you seeing—is there anything out there in terms of the need to invest and more marketing dollars to close each sale, or more IT tools and analytics to enhance the value of the products that’s fundamentally changing the underlying economics of the business? Just to address any questions given the increase in expenses here.

Tom Monahan

Hey Tim, it’s Tom. I think it’s safe to say we’re fundamentally committed to a high level of profitability, and that profitability is a function of two different dynamics. One is margin reflects on one side expanding margins from scaling businesses, and on the other side there are margin pressures from service and growth investments. If you look at 2011, the way those factor out is slightly more investment in some close-in, achievable growth opportunities that powers longer term growth. So think about putting a marketing team on the ground in a market that isn’t quite yet at scale – they’re going to be operating a lower level of productivity than the team operating in the east coast of the United States, so that’s going to put a little pressure on margins. And the net effect of those factors is that next year’s margin at the Company level is at the lower end of our historical range.

I don’t think there’s anything that’s changed foundationally as to the profitability of the business. We have said that looking back, there were places where we—on the margin we think we underinvested a little bit in service in our early decade growth run, and I’d say the average servicing investment per member has gone up very slightly, but it’s at a range where we’ll be able to stay in the historical margin range that we showed you in the deck.

Tim McHugh – William Blair & Company

Okay, thank you. And then Rich, can you talk a little—maybe if you can quantify a little more. You talked about the incentive comp jumping up relative to what you had throughout the—earlier in the year, and then you talked about some more one-time stuff like integration expenses. Can you quantify that at all so we have a sense for how much was that versus other trends in expenses?

Richard Lindahl

Yeah, I would say that as far as the Iconoculture related costs, that was in the area of roughly a penny per share, maybe a little bit more impact in the quarter. As far as the increased incentive accruals, just to be a little bit clearer about what that is – we had a higher rate of bookings in the fourth quarter that came in above our targets for the year. That drove some above planned performance for the individuals there, as well as for other bonus eligible employees; so we had not only the accrual on that achievement but then also a true-up for the full year that impacts the fourth quarter there.

When you look at the different line items, I would say that in the member relations and marketing, the total increase sequentially was about 3.5 million. I would say the majority of that came from that incentive accrual impact.

Tim McHugh – William Blair & Company

Okay, thank you.


Our next question comes from David Ridley-Lane with Bank of America Merrill Lynch.

David Ridley-Lane – Bank of America Merrill Lynch

Yes. I saw that average pricing was up around fourth quarter. Great to see that. Do you have any commentary on what we can expect to see pricing increase for full year ’11?

Richard Lindahl

Yeah David, we’re still seeing the same kinds of trends that we talked about last year and back to our historical average of 3 to 5% pricing increases. I would expect to see that continue as we go through 2011. Obviously on a weighted average, that mix is going to be impacted by middle market versus large corporate memberships overall, but at the individual contract level that’s the trend that we’re still seeing.

David Ridley-Lane – Bank of America Merrill Lynch

Okay, great. And then maybe just to be ultra-clear on this – of that 8.3 million sequential increase in operating expense, what is the amount that’s sort of non-recurring in your view? You’ve got the majority of that increase in member relations and marketing. Are there any other certain non-recurring costs there?

Richard Lindahl

You know, again, it’s not necessarily non-recurring as more timing, so they shifted into the quarter. I would certainly encourage people to, again, go back to look at our guidance on a full-year basis and recognize that some expenses are going to shift from one quarter to another. We saw a little bit more of that impact in the fourth quarter which actually, if you go back and look at last year, we had a similar trend occur as well. It’s not uncommon for that to occur.

David Ridley-Lane – Bank of America Merrill Lynch

And maybe if I could just squeeze one more in – how are you balance the current sort of all-in single price for a product with the new approach of having add-on services or add-on products? Can you walk us through your thought process of why you’re doing the add-ons instead of just including the new services in the existing product and then raising the price for that product?

Tom Monahan

David, it’s a great question. It’s one that every single time we identify an unmet member need, we ask ourselves, which is what’s the right way for us to create the most value for the member and create the most growth in profit for the firm? I don’t think we come to that question with any particular predisposition on an individual basis. There are certainly situations where the right thing to do is bundle it in and take price. There are certainly situations – often if it’s a new buyer or new core user – where it makes a lot of sense to make it an independent stand-alone product. So we make that decision on a case-by-case basis in a way that we think optimizes the economics for the Company and creates the most sense for the buyer.

David Ridley-Lane – Bank of America Merrill Lynch

All right. Thank you very much.


As a reminder, star, one if you’d like to ask a question at this time. Star and the number one on your telephone keypad. And we’ll go next to Toni Kaplan with Morgan Stanley.

Toni Kaplan – Morgan Stanley

Hi, thanks for taking my question. What are your long-term goals for margin expansion and how quickly do you think margins can ramp up after you finish your hiring initiatives?

Tom Monahan

Sure. We haven’t explicitly set a long-term goal for margins, but I think you know from our history that we are committed to high levels of profitability. As Rich outlined, our Company-level margin reflects a mix of a couple different factors – expanding margin from scaling businesses, servicing investments, overall mix of businesses, and new markets and new products. Given our investments right now in service and selective investments in new products and markets, we’re guiding 2011 to be at the lower end of our historical margin range, and for the foreseeable future that’s where I’d expect margins to net out at. Any one of these factors can push the margin higher or lower in a given year, but we’re committed to strong levels of profitability that balance current margins with future growth; and there is still that intrinsic scalability in all of our products, even when we make market-level investments. If you think about it, we can build the world’s best database and set of best practices on succession management. It costs a little bit of money to customize that resource for middle market or Singapore, but ultimately you still get some real leverage out of that leading insight and big intellectual property asset.

Richard Lindahl

And Toni, this is Rich. I think I might jump in there and maybe just add a little bit more color on how we see margins playing out in 2011. I think obviously there is that range that’s influenced by the factors that Tom talked about. I think you’ll see variability on things like the incentive costs and also volume-based costs based on booking levels and membership trends throughout the year, and then also there is the seasonality from quarter to quarter. Looking at the three categories, I think we would expect to see some modest scaling in cost of services this year with improvements in the existing subscription products generating incremental margin, but that being offset by additional new product investments as well as increased investment in some of the research coverage areas that Tom talked about, like the emerging markets. So overall we’d expect cost of services as a percentage of revenue could be, say, 50 to 100 basis points lower on a full-year basis than it was in 2010.

On the member relations and marketing side, our expectation would be that that ratio will hold at roughly the fourth quarter levels for the year, and that represents obviously a higher overall spending year to year. That expectation is a function of both the earlier stage productivity in some of our growth markets, like Southeast Asia and continental Europe; the fact that we’re adding new staff to add capacity but that they’ll initially be less productive in North America; and that we are making select increases in our overall marketing investments.

And then on the expansion side, we would expect to see G&A scale pretty well as a percent of revenue through the year, and I’d say somewhere in the area of 150 to 200 basis points reduction in G&A as a percent of revenue for the full year is a reasonable expectation.

Toni Kaplan – Morgan Stanley

Great, thanks. I know you mentioned that you’ll be deemphasizing this, but how many membership programs are you currently offering, and how many do you plan to introduce in 2011?

Tom Monahan

We have 51 in the market right now. I think what we said last year is that number tends to be in the 3 to 5 range, but to David’s earlier question, if we have a great idea that needs to be embedded in one of our existing products, we reserve the right to adjust where that comes from. We did say, give or take, we’d expect in any given year around 15% of that year’s growth to come from products introduced or new features introduced that year, so that probably is the target we manage to internally a little more aggressively than any product count. We think of it in terms of are we driving profitable contract value growth.

Toni Kaplan – Morgan Stanley

Great. Thanks so much.


We’ll take our next question from Dan Leben with Robert W. Baird.

Dan Leben – Robert W. Baird

Thank you. Good morning. Just quickly on the contract value performance in the fourth quarter – great performance, best sequential increase you guys have seen since 2006 when you were on a much different growth profile. Can you help us understand some of the drivers behind that in terms of new wins versus retention rates, as well as with that type of backdrop, why should we still be thinking about potentially a sequential decline in the first quarter?

Richard Lindahl

Well, on the—let me take the last one first. Again, the dynamic is such that the first quarter is the largest renewal pool. Most of those renewals will occur earlier in the quarter. We’re still seeing very encouraging renewal rates, but the new business comes more towards the end of the quarter and so as far as the revenue is concerned, you have a few less months of revenue to collect in the quarter related to the trend in contract value. And I think the contract value trend will be more influenced by the overall size of the renewal pool being so large, which is what we talked about last year. So we’ll see how the performance plays out, but again, on a relative basis I would expect the trend to be similar to what we had last year.

As far as overall trends in contract value growth, again, Iconoculture was a big contributor on a year-over-year basis. We did continue to see very strong program renewal rates certainly relative to where they were pre-recession. They were comparable to those rates. We saw continued improvement in cross-sales and encouraging progress in new sales in the fourth quarter, which was nice to see as well.

Tom Monahan

And as Rich said, Dan, from a regional perspective we thought North America and Asia Pac were very strong. Europe held its own given the fact they went through a pretty major transition this year, but they weren’t at the growth levels of the other two regions, and we’d expect over the year for them to continue to mature along in these new rules and capabilities and show some of the productivity lift that we got out of Asia Pac and North America over these past couple years.

Dan Leben – Robert W. Baird

Okay, great. And then just to clarify a little bit – when you’re talking about foreseeable future, is that foreseeable within the guidance, or are you talking of something that’s kind of multiple years in nature?

Tom Monahan

In a business with our level of annual visibility, we try to give guidance when we have best visibility into the next 12 months, and we’ve got a pretty clear picture of the next year and that’s how we like to think about our guidance. We do try to give you some sense of how the contours of the business play out over coming years. I think when I laid our my sources of contract value growth, think of that as a multi-year profile of how contract value growth tends to come into the business; but our real visibility is a year out.

Dan Leben – Robert W. Baird

So when we’re thinking about the three-year time frame or whatever, kind of outside of the guidance, should we think of this as there being upside to the higher ends of those margin potential, or is it the fact of the growth largely coming internationally, mid-market – some of these areas that may not have quite the margin profile that kind of multi-year at the lower end of the range?

Tom Monahan

Yeah, I think it’s too early to make that call definitively. I would say right now given the margin levels we’re talking about to begin with and the attractiveness of the close-in growth opportunities, if we’re confronting the growth opportunities we see right now and the opportunity to grow, we would probably make the decision to be more toward the lower end of the historical margin range than the higher end, because for a couple hundred basis points to open up new markets and over time to build real attractive cash streams out of them, is a pretty attractive NPV and even near-term cash flow bet. But that’s a market-by-market, year-by-year decision that we take a look at, and the good news is in all of those scenarios, we get a lot of leverage from our existing install base and our existing rich intellectual property assets and data assets. You know, we get good scale out of those which does create comfortable margin opportunities for us.

Dan Leben – Robert W. Baird

Great. Thanks, guys.


It appears we have no further questions in queue at this time. I’d like to turn the conference back over to Mr. Monahan for any closing remarks.

Tom Monahan

Thanks for calling and/or logging in today. Rich and I will be at the Deutsche Bank conference next week, the Baird conference later in the month; and as Rich mentioned, we’ll host Investor Day at the NYSE in New York on March 18. We look forward to seeing folks there or in our various travels across the late winter and early spring. Thanks again for calling and logging in today.


That does conclude today’s conference. Thank you for your participation.

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